MakerDao has two lines of defence which allows the token to maintain the stability despite the fact that it is backed by an unstable asset. If a user wants to withdraw Ether from the contract, they would need to pay back the same amount of DAI – which is how the fee kicks in. The smart contract can then generate MakerDAO’s DAI token, which gains interest (which is the “stability fee”) over time. This becomes the collateral which helps maintain the peg. MakerDAO uses a smart contract and the Ethereum blockchain, which allows Ether to gather into something called a Pooled Ether (PETH). Read more: An overview of stablecoins MakerDAOĮasily one of the better known crypto-backed stablecoins MakerDAO aims to use its native Maker tokens coupled with the Ethereum blockchain with the intention of minimizing price volatility. The stablecoin is dependent of the collateralized cryptocurrency.The pledge system has less promise of stability in the case of a huge spike increase or decrease of the collateralized stablecoin and.The system is more complex than that of a fiat-backed token.There is higher liquidity than fiat-backed tokens and.Regulation and transactions are easy and quick because it is fully blockchain-based.
There is a higher level of decentralization.For example if a crypto-backed token is pegged to the US dollar it will have something closer to a $2.00 peg for every $1 stablecoin issued. This means that the token will not have a 1:1 ratio for the collateral crypto as it simply would not be able to hold its peg. Instead of using the fiat as collateral, however, the crypto-backed stablecoin has cryptocurrency locked up as collateral – usually, Ethereum is used.Ī crypto-backed token will use a ‘security pledge’ to compensate for the volatility of the cryptocurrency which is being used as collateral. What is a cryptocurrency-backed stablecoin?Ĭrypto-backed stablecoins essentially operate in the same way that a fiat-backed stablecoin does it holds its value to a pegged asset. Although it usually has a fiat currency as its pegged value, a stablecoin which is backed by a cryptocurrency has a cryptocurrency token as collateral in order to compensate for any volatility that the market might show. A stablecoin which is backed – or collateralized – by means of a fiat asset, such as the US dollar is fiat-backed. How is a crypto-backed stablecoin different to a fiat-backed stablecoin? Tether has been slammed by users who claim that Tether manipulated the price of Bitcoin by creating newly printed USDT tokens.įortunately, stablecoins reputation isn’t pegged to Tether’s controversies and other stable tokens have managed to find their way successfully into the cryptocurrency market. Tether is arguably the most well-known stablecoin, but it has faced heavy criticism for its seemingly centralized nature and a lack of auditing. There are three types of stablecoins, namely: It holds the best aspects of the cryptocurrency market but leaves the volatility behind. The fundamental concept of a stablecoin is to hold the stability of its pegged value while maintaining its reputation of a cryptocurrency. Usually, the pegged to an asset such as gold or a fiat currency like the US dollar. In the short of it, a stablecoin is a cryptocurrency token which has its value at a 1:1 ratio pegged to a stable asset. And they’re rocking the cryptocurrency industry. Sounds amazing, right? A decentralized tender, with peer-to-peer promises, a blockchain base, and stability as though the token was fiat. Imagine a currency which had all of the attributes of a cryptocurrency with none of the volatility.
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